Chevron 2006 Annual Report

NOTE 21. EMPLOYEE BENEFIT PLANS – Continued
Assumptions The following weighted-average assumptions were used to determine benefit obligations and net periodic benefit costs
for years ended December 31:
Pension Benefits
2006 2005 2004 Other Benefits
U.S. Int’l. U.S. Int’l. U.S. Int’l. 2006 2005 2004
Assumptions used to determine
benefit obligations
Discount rate 5.8% 6.0% 5.5% 5.9% 5.8% 6.4% 5.8% 5.6% 5.8%
Rate of compensation increase 4.5% 6.1% 4.0% 5.1% 4.0% 4.9% 4.5% 4.0% 4.1%
Assumptions used to determine
net periodic benefit cost
Discount rate 1,2,3 5.8% 5.9% 5.5% 6.4% 5.9% 6.8% 5.9% 5.8% 6.1%
Expected return on plan assets 1,2 7.8% 7.4% 7.8% 7.9% 7.8% 8.3% N/A N/A N/A
Rate of compensation increase 2 4.2% 5.1% 4.0% 5.0% 4.0% 4.9% 4.2% 4.0% 4.1%
1 Discount rate and expected rate of return on plan assets were reviewed and updated as needed on a quarterly basis for the main U.S. pension plan.
2 The 2005 discount rate, expected return on plan assets and rate of compensation increase reflect the remeasurement of the Unocal benefit plans at July 31, 2005, due to the acquisition of Unocal.
3 The 2006 U.S. discount rate reflects remeasurement on July 1, 2006, due to plan combinations and changes, primarily merging benefits under several Unocal plans into related Chevron plans.
Expected Return on Plan Assets The company’s estimates
of the long-term rate of return on pension assets is driven
primarily by actual historical asset-class returns, an assessment
of expected future performance, advice from external
actuarial firms and the incorporation of specific asset-class
risk factors. Asset allocations are periodically updated using
pension plan asset/liability studies, and the determination of
the company’s estimates of long-term rates of return are consistent
with these studies.
There have been no changes in the expected long-term
rate of return on plan assets since 2002 for U.S. plans, which
account for 70 percent of the company’s pension plan assets.
At December 31, 2006, the estimated long-term rate of return
on U.S. pension plan assets was 7.8 percent.
The market-related value of assets of the major U.S. pension
plan used in the determination of pension expense was
based on the market values in the three months preceding
the year-end measurement date, as opposed to the maximum
allowable period of five years under U.S. accounting rules.
Management considers the three-month time period long
enough to minimize the effects of distortions from day-to-day
market volatility and still be contemporaneous to the end
of the year. For other plans, market value of assets as of the
measurement date is used in calculating the pension expense.
Discount Rate The discount rate assumptions used to determine
U.S. and international pension and postretirement
benefit plan obligations and expense reflect the prevailing
rates available on high-quality, fi xed-income debt instruments.
At December 31, 2006, the company selected a
5.8 percent discount rate based on Moody’s Aa Corporate
Bond Index and a cash flow analysis that matched estimated
future benefit payments to the Citigroup Pension Discount
Yield Curve. The discount rates at the end of 2005 and 2004
were 5.5 percent and 5.8 percent, respectively.
Other Benefi t Assumptions For the measurement of accumulated
postretirement benefit obligation at December 31,
2006, for the main U.S. postretirement medical plan, the
assumed health care cost-trend rates start with 9 percent
in 2007 and gradually decline to 5 percent for 2011 and
beyond. For this measurement at December 31, 2005, the
assumed health care cost-trend rates started with 10 percent
in 2006 and gradually decline to 5 percent for 2011
and beyond. In both measurements, the annual increase to
company contributions was capped at 4 percent.
Assumed health care cost-trend rates can have a significant
effect on the amounts reported for retiree health care
costs. The impact is mitigated by the 4 percent cap on the
company’s medical contributions for the primary U.S. plan.
A one-percentage-point change in the assumed health care
cost-trend rates would have the following effects:
1 Percent 1 Percent
Increase Decrease
Effect on total service and interest cost components $ 8 $ (8)
Effect on postretirement benefit obligation $ 89 $ (85)
Plan Assets and Investment Strategy The company’s pension
plan weighted-average asset allocations at December 31 by
asset category are as follows:
U.S.
International
Asset Category 2006 2005 2006 2005
Equities 68% 69% 62% 60%
Fixed Income 21% 21% 37% 39%
Real Estate 10% 9% 1% 1%
Other 1% 1% – –
Total 100% 100% 100% 100%
The pension plans invest primarily in asset categories with
sufficient size, liquidity and cost efficiency to permit investments
of reasonable size. The pension plans invest in asset
categories that provide diversification benefits and are easily
CHEVRON CORPORATION 2006 ANNUAL REPORT 75